If 52 Is My 62: Is Taking Early Retirement Right for Me?

Key Takeaways

Early retirement may be a possibility, but crunch the numbers first

The rule of 55 could allow you to tap your 401(k) early without tax penalties

A second career could offer life-quality benefits in addition to income and stretching your savings [A second career could offer life-quality benefits in addition to income and stretching your savings]

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Over the years, financial planners meet a lot of folks in their 40s considering when to retire, who think it would be great to retire early, maybe sometime in their 50s. But there’s always that pesky hitch of money.

Sometimes, though, people might just get that opportunity—say, if their company is downsizing and offers them an early retirement package. “It might be a nice way to get paid, at least for a while, while you take a break, try out how retirement works, and/or figure out your next career move,” said Christine Russell, who is senior manager of retirement and annuities at TD Ameritrade.

There can be lots of reasons for taking early retirement. Maybe you’re thinking of it anyway, and the company package is a bit of serendipity. Maybe you’re unhappy with your boss, or you might have an ailing family member you need to take care of. Maybe you’re not looking to retire at all; you just want to change careers, if what you’re currently doing isn’t what you want to do for the rest of your life, or you want to use different skills.

Russell knows of an attorney—a criminal litigator, no less—who, when she got older, became a concierge at a North Carolina golf course. That was a full-time gig, but because it was so much less pressure than her lawyer job in the northeast, “to her it felt like part time,” Russell said. Although the attorney didn’t get offered an early retirement package, her decision to take early “retirement” could be inspiring if you’re thinking about making the leap.

If you’re hoping to change careers, do some research on what you think you might want to do and start figuring out the skills you need now. You’ll need to let your new employer know why you might be a good fit for the role, given that it’s something new. You may have to be flexible in your requirements. Also, when changing careers you may have to start at a lower level or work for someone younger than yourself, to prove that you can do the job. So make sure you’re mentally and financially prepared for the change.

Assess Your Finances

If you’re considering taking early retirement, always start with the finances, Russell said. Look at what you’re spending today versus what your new lifestyle would require and what the early retirement package your company is offering looks like. In addition to having a basic budget, make sure to have a cushion.

Financially, you want to crunch the numbers so you don’t retire at 50 and end up having to go back to work when you’re 85, she said.

Assessing your finances means looking at your spending list today and analyzing how that spending will change as you get older. There’s housing and health care, hobbies, and other retirement lifestyle considerations. Some retirement pros advise people to categorize spending into “needs, wants, and wishes.”

If you do fully retire early, how will you spend your time? Those activities may have a cost, so remember to include them in your planning.

Retirement Savings and Social Security Considerations

Keep in mind that the IRS offers an exception that will let you sidestep the 10% early distribution penalty when you withdraw from a company retirement account, such as a 401(k) or 403(b), if you leave your job after you turn 55 years old. It’s known as the “rule of 55,” and it’s an exception to the penalty you’d normally be hit with if you take a distribution, for whatever reason (including hardship), before age 59 1/2.

Of course, that might stress your retirement savings, especially if you live longer, so it’s especially important to analyze your nest egg and retirement expectations before doing that.

It’s also worth noting that you generally can’t tap your social security benefits until you’re 62. And even then, you may wish to delay receiving Social Security, as the government offers incentives to those who wait. In order to receive your full retirement benefit you have to wait until age 66 or 67 to collect.

So if you don’t want to take Social Security early or dig into your retirement savings, you may want to opt for a second career—maybe one that offers more of a work-life balance than you’ve had in the past. Given that many folks will spend 30+ years in retirement, a more fulfilling and stress free career could be just the thing to improve your retirement security.

TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.

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